Should I buy a home?
Buying a home is one of the biggest investments you will ever make. Use our tips and tools to see if you're ready to buy.
For most people, tax and investment benefits make home ownership an attractive option compared to renting.
- Income tax reduction. In most cases, mortgage interest and property taxes reduce both taxable income and overall tax bills. In addition, if you sell your home at a profit, it's likely that much or all of your gain will be tax-free under federal tax rules approved in 1997.
- Wealth-building possibilities. A home is not only shelter; it's also an investment. While there's no guarantee that real estate prices will rise, a home is the single largest asset that most people hold.
- Tax-deductible borrowing power. As your home equity increases, you can borrow against it for any need with a home equity loan or line of credit.¹ Because your loan or line of credit is backed by the equity in your home, you may be able to subtract the interest² from your taxable income - which could lower your final tax bill.
1The state of Texas does not allow home equity lines of credit. 2Consult your tax advisor regarding the deductibility of interest.
Find out what house you can afford. Before you go out shopping for a home, it's a good idea to pre-qualify for your mortgage with a lender. This will let you know how much you can afford and boost your bargaining power with home sellers. Lenders base how much you can afford on a variety of factors:
- Monthly Payments. Many lenders require your total mortgage payment, including principal, interest, property taxes and property insurance to be no more than 28%-33% of your gross monthly income depending on your down payment. Learn how much your payments will be.
- Debts. Lenders generally require your monthly ownership costs (mortgage interest, principal, property taxes and insurance) plus other monthly debt payments (car loan, student loan, credit card payments), to be no more than 36%-38% of your gross monthly income. Learn how much you can borrow.
- Credit Record. Do you have a good credit record? If not, is there a good explanation for any late or missing payments listed on your credit report? Check your credit ratings with one or more of the three big credit-reporting agencies.
- Experian (TRW) (www.experian.com) 888.397.3742.
- Equifax (www.equifax.com) 800.997.2493.
- Trans-Union (http://www.tuc.com/) 800.888.4213.
- Employment record. Lenders will look more favorably on someone who has had the same job or occupation for the past several years than someone who has changed fields frequently. If you're self-employed or work on a commission, lenders will require more financial documentation (personal and business tax returns, balance sheet, and profit-and-loss statements).
Note: Lender guidelines are designed to be flexible. Even, if you don't meet all of the lender requirements, you may still qualify for financing.
The amount of your down payment depends on three factors: the requirements of the lender you choose, the type of mortgage involved, and your financial situation. A conventional loan, which is not guaranteed or insured by the federal government, usually requires a down payment of 5% to 20%. Find out how much you should put down.
- Down payments less than 20%. If you put down less than 20% you'll need private mortgage insurance (PMI), which guarantees payment to the lender in case of default. Many buyers choose to get PMI and save their cash for other purposes even if they do have 20% to put down. Putting less cash down creates both a larger monthly payment and a larger interest cost. However, the higher interest costs creates a larger tax deduction for most homebuyers. Learn about the advantages of extra payments.
- pecial mortgages with 0% to 5% down. Some programs, such as the Federal Housing Administration (FHA) loan program and Veterans Administration (VA) loan program, provide loans with low down payment for qualified borrowers. FHA loans are available to all borrowers, while VA loans are available only to individuals with appropriate government service.
State-backed loans are also available for first-time purchasers. Your loan officer or real estate broker can give you information on loan programs with low down payments - Down payment help. You can also use gifts and grants from parents, friends, community groups and others for your down payment. To satisfy lender requirements, the donor will be asked to supply a gift letter showing that there is no expectation of repayment. For gift and estate tax information, see your tax professional.
- • Shared equity. Instead of an outright gift, family members, friends and even investors can provide some or all of the down payment in exchange for an equity interest in the home. This type of deal can provide tax advantages for both parties, but an attorney and tax professionals should review the agreement.
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